There aren’t many businesses that I’m confident will be around in another 100 years.
Just take a look back over the last century as proof, as humans revolutionized almost every facet in our lives. Retailing went away from the traditional model of full service and turned into the 200,000 square foot behemoth stores we have today, decimating anyone not willing to adapt. Communications have come a long way from sending a letter or a telegraph. Even the way we get around has changed drastically. A trip across the ocean used to take a week on the fastest liners of the day. Now I can step on a plane in Toronto and step off it less than eight hours later in London.
There’s one business I’m confident that will be around in 2115, and I’m betting it’ll be pretty close to its current form. That sector is banking.
Sure, there have been changes in the sector over the last century, but the guts of the business are still the same. People still need to borrow money to get things they can’t afford to buy outright, like houses and cars. Businesses need financing to expand, maybe eventually growing to the point where they need to tap capital markets for funding. And clueless investors will always need experts to negotiate the choppy waters of the stock market. Every major change in the banking industry has the same thing in common — it simply makes it easier for folks to move money around, whether it’s spending it on credit cards or paying bills online.
Banking is a sector every investor should have in their portfolio. And fortunately for Canadian investors, we have a bunch of solid options right here, with the big five banks that every Canadian has at least heard of, and most likely has done business with. The problem isn’t figuring out that the banks are a good investment. The problem is figuring out which one to own.
I think Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) should be your top bank stock in 2015, for one really simple reason.
It underperformed last year.
Although the relationship isn’t perfect, here’s what I’ve found. If a banking stock tends to significantly underperform its peers over the course of a year or two, the stock subsequently tends to make up for lost ground.
A recent example is Royal Bank of Canada (TSX: RY)(NYSE: RY) back in 2010. The rest of the sector ended the year firmly in positive territory, rising anywhere from 6.4% to 18.6%. Royal Bank severely lagged them all, ending the year 4.5% lower.
But over the next two years, it was the best performer of the bunch rising more than 14% while its peers ranged from a 12% return all the way down to just 2% (all excluding dividends). In fact, in the four years since the end of 2010, Royal Bank has outperformed every one of its peers on a cumulative basis.
2014 wasn’t particularly kind to the Bank of Nova Scotia. Although the company still recorded solid profits and took some prudent steps like laying off some workers, the stock lagged. It finished the year in negative territory, while the rest of the sector enjoyed double-digit returns.
This is exactly the kind of underperformance investors should be looking for. The company is still doing well, expanding in the lucrative credit card business and growing its Latin America exposure. The market just isn’t rewarding it.
Instead of worrying about what Mr. Market thinks, just take advantage of his momentary insanity to buy Bank of Nova Scotia. It trades at a P/E ratio of under 12x, currently sports a 4% dividend, and is in the position to eventually have its Latin America exposure pay off in a big way. It might not happen right away, but eventually the stock will catch up to its peers. When that happens, you’ll be glad you owned it.
